Chandrakant H. Shah v. ITO
ITA No. 3966 (Mum.) of 2008
A.Y. : 2005-06. Dated : 12-1-2009
S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free
loan obtained by assessee from sister concerns for purchase of a flat from one
of them cannot be said to be without consideration because while the assessee
was benefited by interest-free loan, lenders were benefited by profit embedded
in the sale consideration, hence not exigible to tax u/s.56(2)(v).
During the relevant assessment year, the assessee took
interest-free loans of Rs.54.70 lacs from four builders (sister concerns) for
purchasing a flat from one of them. The assessee was also employed with one of
the concerns. The Assessing Officer formed an opinion that the assessee was
working with the group for several decades and, hence, having regard to the
said association, these parties gave such a huge loan to the assessee without
any security and interest as a mark of gratitude irrespective of his repayment
capacity and, therefore, in the absence of any obligation on the part of the
assessee to repay these loans, the entire transaction was of the nature of
gift which was given a colour of loan. Accordingly, he added a sum of Rs.54.45
lacs after giving a rebate of Rs.25,000 u/s.56(2)(v) to the total income of
the assessee.
The CIT(A) held that such loan transactions were abnormal
in the sense that there was no interest or any repayment stipulation, and
hence, the said sums were without consideration and upheld the addition.
The Tribunal, relying on various decisions, deleted the
addition.
The Tribunal noted as under :
(1) All these loans have been shown in the balance sheet
submitted along with the return of income as loans and the lenders have also
confirmed the same as such. Thus, apparently, it is a case of loan
transactions and not a case of gift.
(2) Since some of the loans were repaid partly/fully, it
was a material fact so as to rebut the presumption of the Assessing Officer
that the assessee was not under any obligation to repay the loans and this
fact also proves the assessee’s claim that no opportunity was granted by the
Assessing Officer to the assessee before making such addition.
(3) This type of addition also leads to a situation of
having two provisions for charging one type of income i.e. the
legislature has provided two charging sections i.e. S. 68 and S. 56
(2)(v) which cannot be possible. In that case, the legislature would have
made the provisions of S. 56(2)(v) either of overriding nature by stating
that ‘notwithstanding anything contained in S. 68’ or by providing for
applicability of provisions of S. 56(2)(v) in any other manner, in case
provisions of S. 68 could not be invoked. When a specific provision exists
in law for a particular thing, then that thing is liable to be examined
thereunder only and if that item cannot be taxed under that provision, then
that thing cannot be charged to tax under other provisions of the Act.
(4) In the present case, it is not that provisions of S.
68 were not applicable at all and, hence, the Assessing Officer invoked the
provisions of S. 56(2)(v). On the contrary, the Assessing Officer has made
necessary enquiries in that regard and he has not made addition u/s.68 for
the reason that all the requirements of that section i.e. identity,
creditworthiness and genuineness of transactions have been proved. Hence, a
loan transaction has to be treated as a loan transaction only and it should
be examined in the light of provisions of S. 68 and not under provisions of
S. 56(2)(v) and for this reason alone, this addition is liable to be
deleted.
(5) It is important to note that in S. 56(2)(v), the term
‘consideration’ is neither prefixed by the word ‘adequate’ nor it is
suffixed by the words ‘money or money’s worth’. Hence, if in any transaction
there exists consideration as per the provisions of the Indian Contract Act,
1872 such transaction would not come into the ambit of this section.
(6) Consideration for a promise may consist of either
some benefit conferred on the promisor or detriment suffered by the promisee
or both. Hence, on this criteria, the assessee has gained by way of
interest-free loan and the lenders have suffered by giving interest-free
loans and such suffering has got some value and, therefore, the said
transaction cannot be said to be without consideration.
(7) There is another very important aspect of the matter,
i.e. lenders have sold the flat to the assessee. In that sale
consideration, they have earned profit because it is nobody’s case that the
flat to the assessee has been sold at cost. Therefore, lenders have also
derived some benefit which has got value and, therefore, the same forms
consideration for giving interest-free loans to the assessee. Other three
lenders are the sister concerns of the company who actually built or sold,
hence the benefit derived by such company is a good consideration for other
three lenders. Benefit conferred to a third party not connected with the
promissor or promise in a pecuniary capacity would also be a good
consideration to support the transaction. There can be consideration without
any apparent monetary consideration and the only requirement is that the
consideration should create a legal relationship between the contracting
parties and this fact is not in dispute in the present case. Hence, the
transaction is with consideration. The term ‘consideration’ in legal sense,
is somewhat different from what is generally understood and the Revenue’s
decision is based on general understanding and, therefore, the same is not
correct in law. The transaction meets all the requirements of general law
which is only to be looked into while invoking provisions of S. 56(2)(v)
and, therefore, it is a transaction having a consideration and, therefore,
the same does not fall within the ambit of the provisions of S. 56(2)(v) for
this reason also.
